Optimal Dividend Policy Based on Optimal Capital Structure

Abstract

For purposes of maximizing corporate value, I have proposed “Three Pillars of Financial Strategies” such as Equity Spread and Value Creation, Value-Creative Investment Criteria, and Optimal Dividend Policy based on Optimal Capital Structure. After funding value-creative investments subject to threshold as specified in Chap. 5, Japanese companies have to think about cash repatriation to shareholders in order to optimize the balance sheet, thereby avoiding both undercapitalization and overcapitalization. Without proper corporate governance and sophisticated dividend policy, cash held by Japanese companies tend to be discounted as evidenced by Chap. 2. This chapter presents the third value-creation strategy related to optimal dividend policy based on optimal capital structure in a bid to unlock corporate value in Japan. Miller and Modigliani (J Bus 34:411–433, 1961) argue that dividends do not generally affect corporate value under perfect market premises, but they actually do in Japan (Ishikawa in Dividend policy for moving stock price-empirical analysis of collaboration effect. Chuokeizai-Sha, 2010), the land of stable dividends: 30% is corporate Japan’s average dividend payout ratio, and the Life Insurance Association of Japan requires 30%. Japan’s 30% myth persists because Japanese companies mistakenly believe that 30% parallels U.S. averages and stick to this average as a lockstep mentality. They fail to realize that U.S. counterparts set payout ratios according to their stage in their lifecycles. The book’s survey results corroborate that investors focus on ROE (Return on Equity) and governance in conjunction with dividend policy as well. To break the chain of Japan’s 30% myth, this chapter charts total repatriation ratios including not only dividends but also share buyback (TRR), not dividend payout ratios per se, for Japan and other countries. It finds that Japan’s TRR is 33% versus 85% in the US and 63% in Europe. I therefore propose an optimal dividend policy based on an optimal capital structure as proven by investor surveys, interviews, comparisons of total return and empirical research. That optimal dividend policy considers companies’ stages in their lifecycle and balance sheet management as well as issues of corporate accountability.